Fundamentals of Auditing ACC 311
Meaning and objective:
Audit sampling means application of audit procedures to less than 100 % of items appearing in an
account balance or class of transactions to enable the auditor to form conclusion concerning that
Audit sampling enables an auditor to gather audit evidence through the use of tests of control or
substantive procedures, on selected number of items and forming conclusion about the whole
population. The reasons for this are:
a. Economic: Audit becomes cost effective.
b. Time: Complete check would take so long time.
c. Practical: Users do not expect 100% accuracy. Materially is important in accounting as well as in
d. Psychological: A complete check would be boring for the audit staff.
e. Fruitfulness: A complete check would not add much to the worth of figures if few errors were
discovered. The emphasis in auditing should be on the completeness of record and the true and
Exceptions to Sampling
In some cases a 100% check is still necessary. Some of these are:
a. Categories which are few in number but of great importance e.g., land and buildings.
b. Categories with special importance where materiality does not apply e.g., directors' emoluments
c. Unusual, one-off, or exceptional items e.g., accidental loss.
d. Any area where the auditor is put upon enquiry e.g., legal matters, law suits.
e. High risk areas.
Approaches to Audit Sampling:
There are two approaches to sampling in auditing:
a. Judgmental sampling
b. Statistical sampling
We will deal with each in turn.
Note that the objective in all sampling is to draw conclusions about a large group of data, e.g., all the
credit sales made in a period, or all the withholding tax calculations or all the debtors, from an
examination of a sample taken from the group.
Objectives of Audit Sampling:
Auditor is supposed to carry out procedures designed to obtain sufficient appropriate audit evidence
in order to determine with reasonable assurance whether the financial statements are free of material
Here the words "reasonable and material" make it clear that it is not necessary that auditors should state
that the financial statements are absolutely 100% accurate. Sampling does not provide absolute proof
of 100% accuracy but it can provide reasonable assurance that some elements of the financial
statement are free from material misstatement.
Audit sampling means; drawing conclusions about an entire set of data by testing a representative
sample of items.
Population means; the set of data, which may be a set of account balances (e.g. debtors, creditors,
fixed assets) or transactions (e.g. all wage payments, all advice notes).
Sampling units means; the individual items making up the population.
Audit Materiality and Risk
Audit materiality (Tolerable error)
An auditor is not required to have evidence that all items in a set of Accounts are 100% correct. His
duty is to give an opinion on the truth and fairness of the Financial Statements. Errors can exist in the
Accounts and yet the Accounts can still give a true and fair view.
Fundamentals of Auditing ACC 311
The maximum error that any particular magnitude can contain without marring (damaging) the true
and fair view is the tolerable error. Tolerable error is auditing materiality
In his audit planning, the auditor needs to determine the amount of tolerable error in any given
population and to carry out tests to provide evidence that the actual errors in the population are less
than the tolerable error. For example, stock can be a large amount in a set of accounts. Stock is
computed by counting and weighing, by multiplying quantity by price and by summing individual
values. Errors can occur at any of these stages. Applied prices may be incorrect. The effect of
incorrect prices may be to compute a stock figure that is above or below the correct stock figure by
an amount that is above the tolerable error.
This term applies to the risk that the auditor will draw an invalid conclusion from his audit
procedures. Audit risk has several components:
Inherent risk: This is the risk attached to any particular population because of factors like:
∑ The type of industry - a new manufacturing hi-tech industry is more prone to errors of all
sorts than a stable business like beverage.
∑ Previous experience indicates that significant errors have occurred.
∑ Some populations are always prone to error, e.g. stock calculations, work in
Control risk: This is the risk that internal controls will not detect and prevent material
errors. If this risk is large the auditor may avoid compliance tests altogether and apply only
Detection risk: This is the risk that the auditor's substantive procedures and analytical
review will not detect material errors.
The assurance that an auditor seeks from sampling procedures is related to the audit risk that he
The sample sizes required will be related to materiality and to audit risk.
To sample or not?
The auditor, in considering a particular population, has to consider how to obtain assurance about it.
Sampling may be the solution. Factors which may be taken into account in considering whether or
not to sample include:
a. Materiality: Petty cash expenditure may be so small that no conceivable error may affect the true
and fair view of the accounts as a whole?
b. The number of items in the population: If these are few (e.g. land and buildings), a 100%
check may be economic.
c. Reliability of other forms of evidence: Analytical review (e.g. wages relate closely to number of
employees, budgets, previous years, etc.) Proof in total (GST calculations). If other evidence is
very strong, then a detailed check of a population (100% or a sample) may be unnecessary.
d. Cost and time considerations can be relevant in choosing between evidence seeking methods.
e. A combination of evidence seeking methods is often the optimal solution.
Stages of Audit Sampling
a. Planning the sample.
Audit objectives. Why is this test being carried out? What contribution does it make to the
overall assessment of true and fair view?
The population. The population has to be defined precisely. This may be all sales rather
than all sales invoices. (Can you see the difference?)
The sampling unit. Note that in compliance testing it is the operation of the control on a
transaction not the transaction which is the sampling unit.
The definition of error in substantive tests. In stock calculations, an error of greater than
Rs.100 only may constitute an error for this purpose.
The definition of deviation in compliance tests. The deviation may be any failure to carry
out a control procedure or it may be a partial failure.
The assurance required. This is a function of the other sources of evidence available,
Fundamentals of Auditing ACC 311
The tolerable error or deviation rate. This is related to materiality.
The expected error/deviation rate. This is a factor which is not intuitively expected by
students. In fact, errors increase the impreciseness of conclusions drawn from sampling and
larger sample sizes are required if there are many errors.
Stratification. It may be desirable to stratify the population into sub-populations and sample
them separately or in some cases, such as high value items, do a 100% check.
b. Selection of the items to be tested.
c. Testing the items.
d. Evaluating the results. This should also be done in stages:
Analyze the errors/deviations detected in relation to the planning definitions.
Use the errors/deviations detected to estimate the total error in the population. This is called
projection of the errors from the sample to the population.
Assess the risk of an incorrect solution. This will be related to the amount of projection of
error compared with the tolerable error and the availability of alternative evidence
This means selecting a sample of appropriate size on the basis of the auditor's judgment of what is
This approach has some advantages:
a. The approach has been used for many years. It is well understood and refined by experience,
b. The auditor can bring his judgment and expertise into play. Some auditors seem to have a sixth
c. No special knowledge of statistics is required.
d. No time is spent on playing with mathematics. All the audit time is spent on auditing.
There are some disadvantages:
a. It is unscientific.
b. It is wasteful - usually sample sizes are too large.
c. No quantitative results are obtained.
d. Personal bias in the selection of samples is unavoidable.
e. There is no real logic to the selection of the sample or its size.
f. The sample selection can be imbalanced to the auditors needs e.g. selection of items near the year
end to help with cut-off evaluation.
g. The conclusion reached on the evidence from samples is usually vague - a feeling of it seems OK
or of vague worry.
Overall, judgmental sampling is still the preferred method by a majority of auditors. Partly this can be
defended on the grounds that the auditor is weighing several strands of evidence (internal control,
business background, conversations with employees, subjective feelings, past experience, etc.) and is
usually investigating several things at once (e.g. more than one control evidenced on an invoice,
proper books, internal control compliance and substantive testing of totals) so that the whole process
is too complex to reduce to the simple formulations of the statistician. On the other hand, the
statistician can reply that judgment sampling in the past worked well because very large samples were
always taken. Today, the small samples required by economic logic require careful measuring of the
risks attached and this can only be done by the use of statistical techniques.
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